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Question
On 1st April, 2018, a firm had assets of ₹ 1,00,000 excluding stock of ₹ 20,000. The current liabilities were ₹ 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued of ₹ 60,000 at four years' purchase of super profit, find the actual profits of the firm.
Solution
Total Assets of the Firm = ( Sundry Assets + Stock )
= Rs. ( 1,00,000 + 20,000) = Rs. 1,20,000
Current Liabilities of the Firm = Rs. 10,000
Capital Employed = ( Total Assets - Current Liabilities)
= Rs. ( 1,20,000 - 10,000) = Rs. 1,10,000
Normal Profits = `("Capital Employed" xx "Normal Rate of Return"/100)`
= Rs. `( 1,10,000 xx 8/100)` = Rs. 8,800
Goodwill = Super Profits x No. of years of Purchase
60,000 = Super Profit x 4
Super Profits = Rs. `( 60,000/4 )` = Rs. 15,000.
Super Profits = Average Actual Profits - Normal Profits
15,000 = Average Actual Profits - 8,800
Average Actual Profits = Rs. ( 15,000 + 8,800 ) = Rs. 23,800.
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